By Kaveri Niththyananthan
LONDON—TUI /zigman2/quotes/206714402/delayed DE:TUI1 -3.33% Travel PLC on Thursday said it had continued to achieve cost savings and made good progress in its turnaround strategy during a challenging year.
"We have seen sustained improvement in demand since July and recent trading for future seasons remains positive in most source markets," said TUI Travel Chief Executive Peter Long .
However, Mr. Long said that, while current booking activity had been good, driven by demand for its exclusive products, namely club holidays, "We remain cautious about 2011 given the continued economic uncertainty and the relatively early stage of the booking cycle."
Revenue for the year to Sept. 30 fell 2% from the same period a year earlier to £13.53 billion ($17.77 billion) partly due to reduced scheduled flying in Germany. Operating profit rose 11% to £447 million from £401 million as a result of synergy benefits from the merger between TUI AG's tourism business and First Choice Holidays PLC in 2007, and reduced losses at its Canadian and German businesses.
With the merger largely complete, it has delivered £195 million of synergy benefit to date, with a further £5 million expected to be delivered in 2011. It proposed a 7.8 pence final dividend, taking the total for the year to 11 pence, from 10.7 pence in 2009.
The results were affected by a weaker trading performance in the U.K., primarily because of the winter losses that resulted from its smaller offering. Like rival Thomas Cook Group PLC, TUI Travel was hit by political in the U.K. and the volcanic ash clouds that closed much of European airspace for a week in the spring, which Mr. Long described as the "perfect storm."
"We then experienced an improvement in demand later in the summer period and trading closed out well in all source markets, including the U.K.," Mr. Long said.
The CEO described the U.K. market as a dichotomy; confidence is weakening but demand is strengthening. In part, more people were taking all-inclusive holidays, which gives them more certainty about their total spending, but they have reduced their vacation times from two weeks to 10 days to 11 days. Mr. Long said TUI Travel will sell more holidays of this duration to meet the shift in demand.
Additionally, the company has been lobbying the government against increases in air passenger duty, in particular for premium-economy class. Mr. Long described the tax as ridiculous because the premium-economy class mainly catered for taller passengers who wanted more leg room. He said TUI would make a decision about removing premium economy from its aircraft in the first quarter of 2011.
After exiting scheduled flying operations in the U.K. and Germany over the past three years, TUI Travel is now focusing on the turnaround of its French airline, Corsair. It will cut the number of employees by about 25%, freeze salaries for three years, reduce cabin crew composition and limit allowances. TUI Travel said it will also replace its three Boeing /zigman2/quotes/208579720/composite BA -3.81% Co. 747 aircraft with two Airbus A330s, which will help optimize capacity and route planning.
Corsair lost £24 million in the financial year, but TUI Travel said it now should at least break even in the current fiscal year. Material benefits from the program are expected to start to come through in 2012 with full benefits delivered in 2013.
TUI Travel focusing on controlling more of its distribution in order to drive down costs, with about 81% of holidays sold through its own channels, while also looking to cut information-technology related costs and securing better rates from hoteliers.
TUI Travel said cost inflation will be minimal for the summer 2011 season, which is better than Thomas Cook's forecast of 2% and could put TUI Travel in a stronger competitive position.
Mr. Long expects between 250 and 300 jobs to be lost through cost cutting at TUI Travel in Luton, England, where Thomson and First Choice brands are based, but that these will occur through voluntary redundancies and attrition.
TUI Travel was forced to write off £117 million after it discovered discrepancies with its IT system in the U.K. and has restated 2009 results.
Write to Kaveri Niththyananthan at email@example.com